communication: INTEREST RATES... : FX Modelling in Collateralized Markets: foreign measures, basis curves, and pricing formulae
speaker: Nicola Morenispeaker: Andrea Pallavicini
abstract: We present a general derivation of the arbitragefree pricing framework for multiplecurrency collateralized products. We include the impact on option pricing of the policy adopted to fund in foreign currency, so that we are able to price contracts with cash flows andor collateral accounts expressed in foreign currencies inclusive of funding costs originating from dislocations in the FX market. Then, we apply these results to price crosscurrency swaps under different market situations, to understand how to implement a feasible curve bootstrap procedure. We present the main practical problems arising from the way the market is quoting liquid instruments: uncertainties about collateral currencies and renotioning features. We discuss the theoretical requirements to implement curve bootstrapping and the approximations usually taken to practically implement the procedure. We also provide numerical examples based on real market data.
timetable:
Thu 28 Jan, 11:00 - 13:00, Sala Azzurra
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